Best home loan mortgage rate

STEP - STEP - GUIDE TO GETTING A MORTGAGE YOU CAN LIVE WITH

MIDWAY THROUGH LAST YEAR DEIRDRE BROWN-Postell discovered the house of her dreams--or so she thought.

"I was all set to buy a house," says Brow--Postell, 38, a divorced mother who works as an interior designer for Moody/Nolan Ltd., an architectural firm, while freelancing as a historical preservationist for the city of Dayton, Ohio. As part of the city's Nehemiah Project, which assists first-time home buyers, Brown-Postell was able to put down 3% on a home loan and pay no closing costs. Also, by supplying her financial information to her lender, Wells Fargo, in advance, she was preapproved for an $80,000 mortgage.

Her proactiveness and organization were rewarded with a smooth home-buying process, right? Wrong. "A title search revealed that the owner was in tax trouble, so the IRS had placed a lien on the house," recalls Brown-Postell. "We kept waiting, hoping the matter would be cleared up, but the deal eventually fell through."

Now for the good news: Brown-Postell found a house she liked even better, in Trotwood, a town adjacent to Dayton. And although interest rates went up while the first deal was pending, she had already locked in a 6.5% rate on her preapproved loan from Wells Fargo. Within a week and a half, she had an $80,000 mortgage on a beautiful home in a desirable neighborhood. "Because I was preapproved for the mortgage," she says, "there were no problems with the financing once I found a house I wanted with a clear title."

Brown-Postell's experience illustrates just how complicated buying a house can be. To help you navigate it, we've put together a step-by-step guide that gets you in the mortgage know.

STEP ONE:

KNOW YOUR CHOICES

Mortgage shopping is already different from what it was two or three years ago. Interest rates have risen sharply since late 1998--and forecasters expect them to go higher still. Fortunately, the mortgage industry has gone through a quiet revolution and introduced many types of loans and consumer services.

"Today, there's no reason to panic," says Keith Gumbinger, vice president of HSH Associates in Butler, New Jersey, which compiles industry data. "Mortgages are widely available at rates that are around the average for the 1990s."

Here are some of the selections on today's mortgage menu:

* Thirty-year fixed-rate mortgages. These mortgages carry the highest interest rates. In the spring of 2000, they averaged about 8.3%, up from a 30-year low of 6.9% in October 1998 (but still nowhere near the 18.31% rate reached in 1981). However, there is a twofold trade-off. First, because the amount of the monthly payment stays the same, fixed-rate mortgages can provide long-term security for home buyers whose income isn't likely to increase substantially.

Second, "A fixed-rate mortgage is a form of insurance against future interest-rate increases," says William Baldwin, an attorney and financial planner in Waltham, Massachusetts. "You'll pay for this insurance in the form of higher interest rates, so you shouldn't pay for it if you don't need it."

* Fifteen-year fixed-rate mortgages. These mortgages are paid off in half the time of a 30-year loan, so each monthly payment will be higher. (Remember: the shorter the loan term, the greater the amount paid in each installment). For example, going from a 30-year, $100,000 mortgage at an 8.5% interest rate to a 15-year loan at 8% might raise your monthly payment from about $730 to $930. However, you'll avoid 15 years of interest payments and get a slight break on rates, saving you around $90,000 in total outlays. However, 15-year loans are best for people who have solid job security as well as enough income to cover the monthly payments.

"Most people like the comfort of not having a mortgage," says Baldwin. "If you can afford the monthly payments, take a 15-year loan to get your mortgage paid down rapidly. Try to negotiate a loan with no points and low closing costs, and be ready to refinance when rates drop."

Daniel Boyce, a certified financial planner in Southfield, Michigan, offers another suggestion. "I often recommend a 30-year mortgage," he says, "and tell clients that they can pay it off at the same rate as a 15-year mortgage. That way, they can cut back to the 30-year payment [schedule] if they have cash flow problems and not jeopardize their credit rating or their ownership of the home." One caveat: make sure your lender allows prepayments. Some don't, or sock you with a penalty.

* Adjustable-rate mortgages (ARMs). These mortgages have a low initial rate but adjust each year to reflect the current mortgage environment. Generally, the introductory rates are the lowest available: the national average recently was under 7%. The low initial rate means a lower monthly payment, and may enable you to qualify for a larger loan in relation to your income. But because the loan rate goes up when interest rates do, ARMs work best for people who don't plan to stay in a house for long or who expect their income to increase substantially in the future.

This basic one-year ARM was a good fit for Brown-Postell, who was willing to assume the risk of higher future rates because her job was secure and her income from freelance assignments likely to increase. Also, "She got a 6.5% loan," says Virginia Siler, the loan officer at Wells Fargo in Dayton, who helped Brown-Postell through the process. "This loan is called a `1 and 5 loan,' meaning that the interest rate can go up no more than 1% per year and 5% over the life of the loan, for a cap of 11.5%. We used a 7.5% rate--assuming a 1% increase after one year--to compare the projected payment with her monthly income and qualify her for the loan."

The loan is structured so that Brown-Postell can refinance it easily if interest rates fall in the future, according to Siler. "No credit check will be necessary; all that will need to be done is to reconfirm the value of the house. Even if rates don't fall, she should be all right because [Brown-Postell] can expect her income to increase during her professional career," says Siler.

* Hybrid mortgages. "We're seeing tremendous interest in fixed-adjustable loans," says Doug Perry, vice president of production, Countrywide Home Loans, in Calabasas, California. "They offer a fixed rate for three, five, seven or 10 years, after which the rate adjusts every year." Thus, borrowers have some security, knowing that their monthly payments won't increase for a certain number of years, as well as a lower rate. Choosing a three-or a five-year hybrid mortgage (the most popular types) could shave 0.5% to 0.65% from a 30-year fixed mortgage rate. A hybrid mortgage can help home buyers buy more house than they would otherwise qualify for, with the expectation that future increases in the buyer's income will cover interest-rate hikes.

A hybrid loan appealed to Stan Carter, 37, and his wife, Amey, 32, both teachers in Montgomery, Alabama. "We shopped around and wound up with a three-year ARM," says Stan, "because the rate was attractive." The Carters paid one point [see sidebar for an explanation of these upfront fees], "and got a 6.5% loan. After three years, the loan can go up by as much as 1% per year, but no more than five percentage points over the life of the loan." With a loan of over $190,000 from Countrywide, the Carters were able to move into a $200,000 house in Montgomery.

In terms of what's most attractive to home buyers right now, "We've seen fixed-rate mortgages go from 90% to 70% of the overall market," says Gumbinger. "Adjustable-rate loans, especially hybrids, are becoming more popular." In fact, according to the Mortgage Bankers Association, 28% of all loans made in the third quarter of last year were adjustable-rate loans (up from 12% for the same period a year ago). "However, an 8.3% rate on a 30-year mortgage is not the end of the world, so there are plenty of takers out there," he says. (For more on today's mortgage choices, see "Playing the Mortgage Game" in Moneywise, this issue.)

STEP TWO: SEPARATE THE GIMMICKS FROM THE GOOD DEALS

In addition to the mortgage products listed above, lenders have rolled out other options designed to take the sting out of high rates. However, these alternatives--which include 40-year fixed-rate mortgages and negative amortization loans--earn few kind words.

"Forty-year mortgages are a tough sell," says Gumbinger, referring to loans that stretch payments out over an additional 10 years. "They don't save borrowers very much on monthly payments, but they add on 10 years of interest." For example, on a $100,000 loan at 8.5%, you'll pay $177,064 in interest over a 30-year period, but $252,250 over 40 years--an additional $75,186. Similarly, with negative amortization mortgages, you pay a lower "teaser rate" for the first few months, but your debt keeps building up.